Southwest Airlines’ Holiday Travel Woes Don’t Change Our Long-Term Outlook

Southwest Airlines (LUV) shares fell on December 27th. This is as unmoored airlines struggled to normalize operations after a wave of system-wide flight cancellations and delays. Severe winter weather was certainly the main cause of Southwest Airlines’ problems, but other US airlines reported far fewer cancellations, suggesting company-specific factors may be at play. In our view, this event reflects Southwest Airlines’ point-to-point service model, as opposed to the hub-and-spoke model employed by most other US airlines. shows the weaknesses of However, we’ve also heard other explanations, from overbooking to inadequate operating systems. Southwest’s disruption was significant enough to draw the attention of the U.S. Department of Transportation, which said it would investigate the root cause of the problem. Nevertheless, Southwest’s long-term prospects are not immune to these current predicaments. Continue to model more than $28 billion in revenue by 2026, improving operating margin to about 14.5% (2022 revenue is his $24 billion and operating margin is about 8%-9%. (compared to our estimate that there is). We maintain a fair value estimate of $56 and continue to believe the stock is undervalued.